American Home Mortgage hit by margin calls

Lender suspends dividend; shares halted after pre-market tumble

By

AlistairBarr

SAN FRANCISCO (MarketWatch) -- American Home Mortgage Investment Corp. shares came under pressure on Monday after the lender said that recent disruption in credit markets has triggered "significant" margin calls.

Melville, N.Y.-based American Home
AHM
also said it's delaying payment of a quarterly dividend on its common stock to preserve cash and other liquid assets. Dividends on American Home's Series A and Series B cumulative redeemable preferred stock are likely be halted as well, the company said in a statement late Friday.

American Home's shares fell 39%, to $6.39 in pre-open trading on Monday morning. Trading in the stock on the New York Stock Exchange has since been halted.

Some mortgage originators, including American Home, rely on credit lines from large banks to help them "warehouse" loans they've offered. When they've accumulated enough mortgages, the loans are packaged as mortgage-backed securities and sold on to institutional investors in the asset-backed securities market. Without such lines of credit, these lenders find it tough to keep originating loans.

Credit-market disruptions have caused major write-downs in the value of American Home's portfolio of loans and securities. In the wake of those drops, the company said its lenders issued margin calls, which are demands for more money or collateral to back loans.

"Holding off on dividend distributions should help preserve liquidity, which is clearly appropriate given the extremely challenging operating environment," James Ackor, an RBC Capital Markets analyst, wrote in a research report Monday in which he downgraded the stock to sector perform from outperform.

"Aside from this factor, however, we are increasingly concerned that American Home's management does not have a firm grasp on the external issues facing the company, and the impact of these issues on the company's underlying fundamentals," he added.

Survival, takeover

American Home's shares are down roughly 70% so far this year. They have been hit hard by turmoil in the subprime mortgage market, although the company doesn't offer those types of home loans.

Instead, American Home has specialized instead in adjustable-rate mortgages and so-called "Alt-A loans," which often require less documentation of a home buyer's income. In late June, the company said it stopped making stated-income home loans with high loan-to-value ratios. (With stated-income loans, borrowers state their income, rather than document it) See full story.

American Home can probably survive margin calls from its creditors, but that's no longer "a foregone conclusion," RBC's Ackor said.

The company had $837 million in cash on hand at the end of the first quarter, according to Ackor. Roughly $500 million of that was being used to support loans held for sale, suggesting $337 million is free to meet margin calls. The company also raised more than $200 million selling common and preferred stock in the second quarter, adding to liquidity, Ackor said.

American Home has a large, quality mortgage origination platform, so if financing problems continue, the company could be acquired for a price that's at or near the value of its tangible assets, the analyst added. The sale of the company is "increasingly likely," he wrote.

Confessional

On July 19, American Home's stock slumped amid speculation that the company's credit lines were being pulled. However, analysts dismissed the notion, saying the company told them that its credit lines were intact. See full story.

The following day, Mary Feder, vice president and investor relations director at American Home, told MarketWatch that none of the company's credit lines were being pulled.

But reassuring analysts and investors less than two weeks before warning about margin calls has undermined the credibility of American Home's management team, according to RBC's Ackor.

"Recent conversations with management reaffirmed to us that many of the factors negatively influencing the company's fundamentals were being effectively addressed, and that recent market rumors of liquidity concerns were completely unfounded," the analyst wrote.

"We certainly acknowledge that the recent and severe erosion in the global debt markets was rapid and unforeseen," Ackor added. "We are concerned, however, that management appears to have either been caught entirely off guard (implying they may not fully understand the implications of a difficult operating environment), has not accurately conveyed the potential impact of these operating challenges to the investment community, or both."

American Home announced its financing problems and the decision to halt dividends after 10 pm on Friday, a move that won't help, Ackor said. He added: "The company's dividend-delay confessional at 10:20 p.m. on a Friday night makes us think that both of these points may have merit."

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